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spk00: Greetings and welcome to the Kodiak Gas Services second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Graham Soans. Vice President, Investor Relations. Thank you. You may begin.
spk05: Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review second quarter 2024 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Chief Financial Officer. Following my remarks, Mickey and John will provide high-level commentary on the company, our second quarter financial results, our updated 2024 outlook before opening the call for Q&A. There will be a replay of today's call available via webcast and also by phone until August 27, 2024. Information on how to access the replay can be found on the Investors tab of our website at KodiakGas.com. Please note that information reported on this call speaks only as of today, August 13, 2024, and therefore you are advised that such information may no longer be accurate as of the time of any replay listing or transcript reading. The comments made by management during this call may contain forward-looking statements within the meaning of United States federal securities laws. These forward-looking statements reflect the current views, beliefs, and assumptions of Kodiak's management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, Various risks, uncertainties, and contingencies could cause the company's actual results, performance, or achievements to differ materially from those expressed in the statements made by management. And management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website. Additionally, during the call, we may reference our earnings presentation that was posted this morning on our website. And now I'd like to turn the call over to Kodiak CEO, Mr. Mickey McKee. Mickey?
spk06: Thanks, Graham, and thank you all for joining us today. I want to begin first by talking about safety. As we always discuss at Kodiak, our first and most significant priority is the health and safety of our employees, and making sure that every employee goes home safe and sound to their families every night. The focus of each and every Kodiak employee on this topic truly embodies the philosophy that we have adopted at Kodiak, safety first all the time. We recently passed our one-year anniversary as a public company, and I want to take a minute to thank our over 1,400 employees whose relentless focus on safety, customer service, and drive to improve margins has helped make Kodiak the industry leader in the contract compression space. I want to take a minute to talk about what this company has accomplished over that time period since doing public. We organically increased our contract compression fleet by over 150,000 horsepower while living within cash flow. We've completed the highly accreted acquisition of CSI, making Kodiak the largest contract compression provider in the U.S. We strengthened our balance sheet, driving leverage down to 3.9 times, well on our way to our goal of 3.5 times by the end of 2025. And we have returned capital to our shareholders through a well-covered and compelling dividend. We think this balance between disciplined growth and shareholder return is being rewarded in the market An investment in Kodiak at our IPO has generated a 91% total return through last Thursday, significantly outperforming the broader market. And we're not done. Given the strong operating environment and highly accretive acquisition, we were pleased to announce that our board recently approved an 8% increase to our quarterly dividends to $0.41 per share and will continue to invest to grow our compression fleet given the strong demand and attractive returns we see in the market. The closing of the acquisition gave us a chance to evaluate the combined fleet for opportunities to make safety and emissions upgrades, identify non-core assets, and further high-grade our customer base. We currently have multiple initiatives in place to begin redeploying or disposing of vital assets that we acquired with CSI. However, that takes some time to execute. Our utilization currently sits at 94%. However, the core large horsepower group of assets that was the focus of the legacy Kodiak fleet and the target of the CSI acquisition remains at effectively full utilization in excess of 98%. In fact, the entire industry utilization in this large horsepower group remains at historically elevated levels, continuing to contribute to the tightness in the market. Going forward, we plan to opportunistically refurbish and upgrade idle assets and look to redeploy them. We also plan to constantly evaluate the fleet for opportunities to high grade our operations, consistent with our core operating philosophy and strategic direction. As noted in our press release, we recently entered into an agreement to sell a significant portion of our small horsepower units in the US and Canada. These units represent only about 1% of our revenue generating horsepower, but significantly reduces our unit count and simplifies our operations both domestically and internationally. Investing in these assets is also consistent with our focus on U.S. large horsepower compression. Next, I would like to discuss the integration process. We've been operating as one company for four months now, and what's clear is that we will greatly exceed our initial cost synergy estimate. We now expect our combined cost synergies to be north of $30 million versus our initial $20 million forecast. Based on these synergies and the underlying strength in the contract compression market, we are raising the low end of our full year adjusted EBITDA guidance and now guiding to a range of $590 to $610 million for the full year 2024. John will discuss the acquisition synergies and our revised outlook in more detail. Now let's discuss our second quarter results. Yesterday, we released second quarter 2024 financial results, including another record quarter with revenues of $310 million and adjusted EBITDA of $154 million, as we have only just begun to realize the combined earnings power of our fleet and the synergies that I mentioned. Turning to our reporting segments, as detailed in our second quarter earnings presentation, we now classify our revenue streams into two buckets, contract services and other services. As the name implies, contract services encompasses our contracted recurring revenue services like contract compression, contract operations, and contract treating. These highly visible, stable, contracted cash flows make up the core of the company. Demand for contract services remains strong. During the second quarter, we added over 41,000 horsepower of new units to our fleet. All were large horsepower, averaging over 2,000 horsepower per unit, and were deployed at rates above the fleet average. And we also had tremendous success in re-contracting units that came up for renewal during the quarter at closer to current spot rates, also significantly above our current fleet average. One thing I want to point out is through the CSI acquisition, we acquired a compression business with a historical margin in the low to mid 50s. In just 90 days, after integrating the assets, cutting costs, and returning idle equipment back to the market, For the quarter, Kodiak was able to deliver a combined adjusted gross margin of 64% for contract services, matching what we did as a company in the comparable quarter in 2023. This is an impressive feat. As I stated earlier, we believe there are additional synergies to be captured and opportunities for further margin expansion. Switching to our other services segment, this segment primarily consists of our station construction, and aftermarket sales business that are less predictable but help support our customers, require minimal capital investment, and generate significant free cash flow that we can invest back into our core compression business. We're excited about our newly expanded service offerings, allowing us to provide additional service to our high-quality customer base. Looking into 2025, we have effectively already contracted our entire CapEx spend for next year as customers have aggressively signed contracts for new horsepower growth and are now looking towards 2026. Approximately half of our 2025 horsepower additions will be electric motor driven, large horsepower units, and we are also selectively converting units to electric to meet customer demand. While we are increasing our electric motor driven fleet, I should remind you that given grid constraints in the Permian Basin, electric compression for large horsepower applications is not always a feasible solution. We're investing now to ensure that we're well positioned to meet our customer's needs for gas engine or electric motor driven compression in the future without losing focus on our core strategy. In summary, We are pleased with our second quarter results in a busy quarter that included closing the CSI acquisition. The integration is going extremely well and we're on track to significantly exceed our original synergy goal. Our commercial team has been actively repositioning our fleet while evaluating opportunities to hydrate our fleet and service offerings. We increased our dividend and our revised guidance indicates that we see continued momentum into the second half of 2024 and beyond. Whether it's capacity prices increasing ninefold in PJM or ERCOT, forecasting electricity use to more than double by the end of the decade, it's clear the US needs to add electric generation capacity and that natural gas will be the most reliable and affordable fuel of choice. and that's on top of the wave of LNG export terminals expected to enter service in the coming years. The increase in gas production required to meet this demand is going to require significant incremental compression horsepower, and we continue to believe that Kodiak is well positioned to be the compression infrastructure partner of choice. Our focus on customers and employees, industry-leading mechanical availability, and our market position will continue to separate us from our peers. And now I will pass the call to John Graves to review second quarter financial highlights and our updated guidance. John?
spk07: Thank you. I'll echo what Nicky said. After factoring in the unique things that impacted the quarter, the underlying results were strong, and the outlook for the remainder of the year is solid. I couldn't be more proud of my team and this company. Needless to say, we've had a lot going on around here for the past year, and in particular in the last few months. It's no small feat combining two public companies and getting everyone singing from the same hymnal. I'd be lying if I said it was easy or over, because it's not, but we think the hardest parts are behind us, so ride on track and the future is bright. Before I dive into our quarterly results, I'd like to touch a bit more on our integration success. We initially identified and communicated more than $20 million of annual cost synergies. Now that we're a few months in, as Mickey mentioned, we're upping that figure to $30 million. Probably the simplest way to explain the math is this. During calendar 24, we expect to realize about $20 million in net cost synergies. But remember, that only includes 3 quarters of combined results. So the implication is that the majority of the ultimate cost synergies we expect to garner from the deal have already been realized, and we think we capture the rest in 2025. Now I'll highlight a few aspects of our second quarter results. Given that the acquisition closed on April 1st, year-over-year comparisons in many cases are not all that insightful, so I'm going to avoid doing that. Total revenues for the quarter were $310 million, with the step change increase from last year largely driven by the CSI acquisition, but also from organic growth in the fleet and continued rate increases from recontracting activities. Adjusted EBITDA was $154 million, and it came in at a 50% margin, Included in that figure are $3.3 million in contract services cost of operations charges spanning several years on potential sales and use taxes related to parts consumption for home compressors, and about $4.5 million in AR reserve charges in SG&A stemming from a comprehensive review post-acquisition of troubled accounts. Excluding those two particular items, adjusted EBITDA for the quarter would have been almost $162 million, a figure in margin that are more in line with where we see things as we move forward. Looking at our segments, as Mickey discussed, we have changed our two reporting segments. In contract services, revenues for the quarter were $276 million with an adjusted gross margin percentage of 64%. As Mickey mentioned, the market remains tight for large horsepower compression. And we expect to see margin expansion in that part of our business as we roll forward through a combination of price improvement and cost management. In our other services segment, revenues were $33 million in Q2 with an adjusted gross margin of 16%. Most of the revenues in this segment come from Kodiak's legacy station construction business and CSI's aftermarket field and shop services and perch sales. Revenues from the other services segment will continue to have some variability from quarter to quarter, but this business allows us to better serve our customers, requires minimal capital, and generates incremental cash flow. In terms of CapEx for the second quarter, maintenance capital expenditures came in at $19 million. Our maintenance spend is a function of the hours and age of our equipment and will vary by year depending upon when units were added to the fleet. but we view the quarter as being generally representative of the run rate for the next several quarters. Net growth cap X was $90 million for the quarter, but that includes a couple of unique items and is not representative of the run rate going forward. First is roughly $20 million in non-cash accruals for potential sales and use taxes on compressor equipment that was placed into service in Texas over the past several years. Second, is a portion of the transaction-related CapEx that we called out last quarter that represents a variety of CSI equipment emission system upgrades and safety-related items that we need to make to get the fleet up to Kodiak standards. For the second half of the year, we're guiding to between $110 and $130 million in growth CapEx, which includes new units, the aforementioned upgrades and safety-related spend, non-unit-related spend, and some real estate optimization activity. As part of this growth capex, we expect to take ownership of an incremental approximately 70,000 horsepower before year-end. Moving to the balance sheet, as of June 30th, we had debt $2.5 billion, consisting of the $750 million in 2029 senior unsecured notes we issued in February and borrowings under our ABL facility. Our credit agreement leverage ratio was 3.9 times, and we ended the quarter with approximately $411 million of availability on the revolver. Let's turn to the updated 2024 outlook. For the full year, which includes 12 months of Kodiak and only nine months of CSI and synergies, we expect revenue will range between $1.12 and $1.18 billion. And we estimate that adjusted EBITDA will range between $590 and $610 million. Let me break that down by segment. In our contract services segment, we are forecasting full-year revenue of $1 to $1.04 billion, with segment-adjusted gross margins between 64% and 66%. Given the constructive market dynamics, our focus on increasing utilization, expense management, and our progress on synergies, we're confident in our segment outlook and our ability to increase long-term, high-quality cash flows. In our other services segment, we are forecasting full-year revenue of $120 to $140 million and segment adjusted gross margins between 14% and 17%. Turning to CapEx, we expect full-year maintenance CapEx to come in between $60 million and $70 million, a bit higher than our prior guidance now that we've owned the CSI assets for a few months. In terms of growth CapEx, we're forecasting between $210 and $230 million for the full year, excluding the roughly $50 million related to the sales tax accrual and transaction-related capex I discussed previously. We're presenting it this way to give a sense for a more normalized level of growth capital spending for the combined company without items that we don't expect to repeat in the future. To wrap things up, as you know, our board approved an 8% increase in our quarterly dividend. 41 cents per share, which will be paid this Friday, August the 16th. This equates to an annualized dividend of $1.64 per share for a yield of 5.7% based on Friday's closing stock price. That's it for my prepared comments. Thank you for your participation and support. I'll hand it back to Mickey.
spk06: Thanks, John. To wrap up, I'm very proud of what this company has accomplished in the years since going public. I want to thank the extraordinary women and men of Kodiak Gas Services for their hard work on integration while staying focused and delivering great results. Each team member's dedication to safety and our customers are what makes Kodiak special, and we would not be an industry leader without this commitment to excellence. I'm happy we're in a position to further reward our shareholders for their investment in Kodiak by increasing our dividends. We have great momentum as we head into the second half of the year. At this point, we will open up the line for questions. Operator?
spk00: Thank you. And at this time, we'll conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from John McKay with Goldman Sachs. Please state your question.
spk01: Hey, guys. Good morning. Thanks for the time. I wanted to start a little bit on the forward outlook for the business. I understand you're not giving 25 guidance here. Yeah, we'd love to hear your thoughts on maybe like a medium term outlook for EBITDA growth going forward. And then very specifically as part of that, you know, we haven't talked about potential revenue synergies from the CSI deal. So maybe we could frame that as part of that growth outlook.
spk06: Yeah, hey, John. This is Mickey. Thanks for listening this morning. Look, I mean, I think the forward outlook is really positive. I think that, you know, the way we kind of framed it up for EBITDA growth for the year is, you know, minus the one-time kind of transactional type of EBITDA adjustments for the year, if you look at that kind of where we think we'll be on a run rate perspective of 162 million in a quarter of EBITDA is pretty representative of where I think we'll be going forward. And then you can kind of layer on that what our kind of standard growth has been over and above, you know, throughout the years on a pretty standard amount of growth capex. I think you can kind of, our business is pretty easy to predict, you know, and it's that quarterly EBITDA and annualize that out and layer on some growth from the growth CapEx that we're investing in the business. And I think you've got a pretty good idea of where we think we'll be. I think that to get to the question about the revenue synergies, John, I mean, you know, We really only have 90 days of data to evaluate right now. We've only owned this business for a quarter now. So we're not really ready to quantify revenue synergies and kind of give any guidance there. I will tell you that we've had some good wins early on here, but it is really kind of too early to tell and too early to give any forward-looking kind of outlook there.
spk01: I appreciate that. switching gears a little bit just to the electrification side, you know, you guys, you know, Mickey, had your comments and the prepared remarks, what we saw, two of your competitors kind of talking up this a little bit, ArchRock with their deal, USAC kind of in a different direction. I'd just be curious on, you know, what this trend looks like from maybe a run rate CapEx needs, what you're hearing from your customers in terms of how important this is to them, and
spk06: high level i mean does this shift at all and how we're thinking about the industry's overall current capital discipline thanks um i don't think it changes the capital discipline in the industry at all um john uh i think that the electrification uh process going forward is going to have some some pockets where it makes sense and some other pockets where it doesn't make sense um We're looking at, as I said in the prepared remarks, about half of our CapEx in 2025 is going to be spent on electric-driven motor machines. Those are for projects that are highly specialized and for our existing customer base that has access to power on those locations. We can tell you that there is kind of a mixed view of electrification coming from our customer base. Some are Some are pushing forward with electrification. Others are really pulling back from electrification. I think that when you look at some of the other things in the industry that are going on, we're going to continue to focus on large horsepower equipment. And large horsepower electric motor driven equipment is a very different animal than small horsepower type of electric motor driven type of equipment, because there's a very different power demand that comes from those. Like I said, we're focused on what we're doing and what we're looking at going forward, and we're going to be participating in the electric motor driven type of realm. We want to be really good at it. We're going to be focused on it, and we think that's part of the future, but we don't think it's going to dominate and be the whole future.
spk01: All right, that's clear. Thanks for your time today.
spk06: Thanks, John.
spk00: Our next question comes from Jim Rolison with Raymond James. Please say your question.
spk08: Hey, morning, Mickey and John.
spk05: Hey, Jim.
spk08: Mickey, maybe you could just, you got the first batch of some of the smaller horsepower stuff that you were looking to sell kind of in process, and then obviously that's going to be ongoing for a period of time, but maybe just a reminder at the end of the day as you kind of look at the fleet you acquired and the horsepower that kind of this maybe non-core, a reminder of how much capacity you think ultimately over the next handful of quarters you're likely to sell and what you think the range of kind of proceeds of that would be and even maybe what you do do with the proceeds?
spk06: Yeah, I think, look, it's going to be pretty hit and miss there. I think like this first batch that we've got, that we're selling is going to kind of give you a little bit of framework to think about. It's going to be probably between $15 and $20 million of annual revenue at some kind of a margin that's less than what our fleet, the large horsepower fleet type of a margin is contributing. I think that you're looking at a multiple less than what we trade at that we get for that equipment. You're not talking about big dollars. You're talking about $15 million of revenue on a company that we're guiding to be north of a billion dollars of revenue already. The numbers are already baked into those guidance numbers. We already expect that. Again, I think that overall in the fleet from a horsepower perspective, we're probably looking at 150,000 to 200,000 horsepower worth of total horsepower that we look to divest ourselves of that are non-core to what we're trying to do, which is domestic, US, large horsepower, oily basin type of liquids, rich basin type of equipment that we can create densification and drive higher margins and have really sticky long-life type of cash flows for our investors.
spk08: Yep, makes sense. This is what you said before. I was just trying to get a magnitude, so that helps. And Mickey, you guys have done some interesting math in your presentation, you know, kind of on the incremental compression horsepower needs relative to the growth outlook for gas volumes. And we can, now that between you, USA, and ArchRock, and even consolidating ArchRock, we can obviously track what a large share of the outsourced side of that equation is doing in terms of orders and how we're keeping up with that demand. Do you have any view or any color from your customer-owned orders and how those have been tracking? Just curious, relative to this mid-50 million horsepower fleet that we've got today, we can track what the outsourced side is, but I'm just curious if you have any view or color on Are your customer orders keeping up from a pace perspective to match where that demand seems to be headed?
spk06: Yeah, I think it is, Jim. I mean, we don't have any real data, but if you ask me what my hunch is, I think that we're, as an industry, losing market share to the in-source market today. and that's driven by the DAC capital discipline in our industry, and we're sitting here today saying, hey, we're only gonna spend X amount of dollars a year on our growth cap bets. We have well in excess of that in opportunities to grow, but we're not gonna deploy that capital and outspend our cash flows in that kind of meaningful way, and I think that you're seeing that with the big public guys in this industry pretty considerably. So if you had to ask me today, I'd say that us as an outsourced industry collectively, that we're losing market share to the insourced industry today. Got it. Appreciate the call. Yes, sir. Thanks, Jim.
spk00: Our next question comes from Teresa Chang with Barclays. Please state your question.
spk02: Good morning. Thank you for taking my questions. I'd love to dig in a little bit more on the supply and demand outlook for compression over the medium and long term. And, Mickey, just how long do you think this tightness will persist?
spk06: Hey, good morning, Teresa. Thanks for joining us. You know, I don't know. I think we've got many, many years of this tightness, Teresa. We've got, you know, you look at the demand side of the business, And LNG plants coming on, that supply of gas has to come from somewhere. You talk about AI and data center driven demand for power. I think that people are probably underestimating the power demand profile that's coming towards us too with all of that demand. There's some really interesting stats out there that really are eye opening and you get estimates for what that power demand is going to be from anywhere from 10 to you know, 18 BCF a day. And, and, uh, if, if, even if you're on the low side of, of that kind of demand profile, the supply of natural gas to feed that, uh, is going to be just extraordinary. And so it's, we've, we've been saying it for a year, even before the, the AI and data center type of, of conversation has kind of become a buzzword in the industry and, And I'm not an expert to be able to predict power demand. But at the same time, what I do know is it's going to require a lot of natural gas and more natural gas than what the US is producing today. And that requires compression. I think at lower natural gas prices, it's a $2 range where they're at today, doesn't feel like it's economical to drill Hainesville wells. So the majority of that natural gas in the short term is going to have to come from oily basins like the Eagleford and the Permian Basin, where we have a great position and it's going to create long-term kind of stickiness of our revenues. When you talk about the supply side, you look at what's happened in our industry over years past, and this industry has made mistakes before of overbuilding equipment and having an oversupply in a time where you didn't need it. This industry is not acting like that today. It's a very well-behaved industry. I mean, some people have increased their CapEx guidance for the year. That's fine. That's a prerogative. But it's still not putting us in a situation as an industry where we're overbuilding. Again, to go back to the comments I made with Jim's question, that we have many, many more opportunities to grow than what we're committing CapEx to. And I have a feeling that that's consistent with our competitors as well. And so we're in a position where we're really restricting the supply from the discipline that we're all showing collectively. And I think that we're in an environment where demand is continually ramping up, and I think that we're probably underestimating what future demand looks like. And I think that this this dynamic is set to have a runway that could last for a decade or two, which seems odd for me to say that, but it's an amazing sort of dynamic today.
spk02: Got it. Thank you for that nuanced answer. And maybe going back to your comments about the many different avenues and projection of growth, So with the CSI assets under your belt for four plus months at this point, what is your view on the M&A landscape from here, given your position and fragmentation or lack thereof in the industry? What do you view as your role and position within the market in terms of M&A?
spk06: I think that... We've got plenty to say grace over right now and probably not in the short term going to be active in the M&A market. Probably a lot of hardworking employees at Kodiak that are breathing a sigh of relief to hear that right now. But, you know, we've got a lot of work left to do. I know that we've owned the CSI business for a quarter now. We've made tremendous progress. We're really excited about the synergy potential there. But we have lots to do, quite frankly. And we're a newly public company, and our focus right now is inward-looking, making sure that we deliver for shareholders, making sure that we're focused on our business and that we're building a strong foundation to continue to build on to take advantage of that multi-decade runway that we talked about a minute ago.
spk02: Thank you very much.
spk06: Thank you, Teresa.
spk00: And a reminder to the audience, to ask a question at this time, press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Once again, to ask a question, press star 1 on your telephone keypad. Our next question. Comes from Zach Van Everen with TPH and Company. Please state your question.
spk04: Hey, guys. Thanks for taking my question. Just going back to the comment on idle compression that you guys can refurbish and bring back to the market, do you have a rough estimate of kind of timeline in the amount of horsepower that might be? Yeah, good morning, Zach.
spk06: Probably roughly. I think you're talking about, like I said before, we're very highly utilized in the large horsepower type of segment, not segment, but kind of portion of the fleet. So I think the opportunity is probably maybe 30,000 or 40,000 horsepower over the next six to nine months. And so pretty low impact dollars, but there is some opportunities to get some wins there and put some equipment back to work. And we're focused on doing that. Probably a little less. less sure about kind of the medium horsepower that kind of 400 to a thousand horsepower range there might be another 40 or 50 000 horsepower available there uh that we might be able to redeploy those uh those opportunities are going to be a little bit uh fewer and farther in between but um but i think that that opportunity over the next year could could present itself and we'll have to and that we'll be able to take advantage of uh and right now in the small horsepower which was where the bulk of the units are that are idle in the legacy CSI fleet. It's probably – there's not a ton of demand in that range today. So I think you've got some opportunities to continue to deploy in large and the medium horsepower side.
spk04: Gotcha. That's super helpful. And then maybe one on the compression side, you know, we saw rates go up. to close to $22 on a monthly base, you know, from just below 20 in Q1. You know, I guess, was this all just the kind of noise around CSI or were there also a decent amount of contract renewals that happened in Q2 that kind of brought this number up?
spk06: Yeah, I mean, I think there was, it was both, to be honest with you, Zach. There was some good renewals and we had some success on renewing contracts and that kind of thing. I don't have the numbers in front of me, but we did kind of execute it as expected there. And on the same side, CSI, as a blended average, as everybody kind of knows, the smaller horsepower equipment has a higher dollar per horsepower average revenue rate. And so blended in with our fleet, because it's a smaller kind of horsepower average per unit, it drives our revenue per horsepower up a little bit.
spk07: Just to finish that thought, this is John, too, on that smaller horsepower. It has a higher revenue for horsepower because it carries a lower margin because labor and parts and pieces will be more expensive than in the small horsepower. The best returns will always come from that large horsepower business.
spk04: Perfect. Very helpful. Thanks, guys. Thanks, Zach.
spk00: Thank you. Our next question comes from Salman Akhil with Stiefel. Please state your questions.
spk03: Thank you, good morning. So with deployments for 2025 pretty well set, and you look out into 2026, and you talked about sort of half being electric today, would you expect that number to continue to move higher as you go into 26?
spk06: I would expect it to minimally stay the same. Yeah, I think it might drive up a little bit, but I would expect that 2026 deployments would probably be at least that much on the electric side.
spk03: Understood. And then just kind of going back to the opportunity to refurbish some of the CSI fleet, again, electric doesn't work everywhere and works better on the smaller horsepower. Is there an opportunity to take those units and convert those over to electric and redeploy them?
spk06: There could be. Potentially that's going to be a capital allocation decision that we're going to have to make if we want to spend the capital on converting small horsepower to electric or spend that capital on deploying large horsepower stuff. So there is an opportunity, I think, that we'll probably explore whether or not we want to be in that small horsepower electric type of business. Um, I think there is a market out there, but I think that, you know, that's not traditionally been our focus and traditionally been our strategy. Um, uh, so, so we need to discuss that going forward.
spk03: Got it. And I think it's just one last one. And I'm thinking about this losing market share to, to the companies themselves. And I guess in part of that, just, they're also seeing this longer runway that you're referring to in terms of the need for compression.
spk06: therefore they're willing to commit the capital and think that they're going to own those units for 20 plus years well i think that if they had access to outsource a lot of that equipment they would but but there just isn't the companies out there spending the capital to buy it to that they can outsource it to um this is a uh you know i've talked about it before pretty extensively that I think everybody in this industry has drastically underestimated the amount of compression it takes to produce Permian oil and gas. It takes traditionally three to four times more horsepower than it takes to produce conventional reservoir type of basin resources. That's a lot of what is causing this tremendous tightness in our market. kind of combined utilization that we've ever had, especially in the large horsepower segment here industry-wide. And so, you think a lot of it is, man, it just takes more horsepower. Horsepower is more expensive today, so everybody's dollar of CapEx doesn't go as far as it used to and buys less horsepower. So, all these things kind of translate into producers and midstreamers are kind of forced to insource more than they probably traditionally would like to. And it's taken a tremendous amount of horsepower to produce what this country is producing in the oil and gas market because of the Permian effect.
spk07: You know, I'll also finish that thought, too. It's very easy to track the public companies in terms of what we're adding to the market, and we all are talking about capital discipline. We've said a lot in our presentations and in our meetings, you know, on the private side, you've seen in our slide where we kind of list a lot of the competitors. It's a capital-intensive business. That's more expensive and harder to come by than ever. The industry, the customer base is consolidating. It's very difficult for startups to get business with the large majors and large independents that now, you know, control the majority of the acreage in the Permian area. it's just a different calculus. And so we do believe that that 75%, 80% that the public companies control is really where most of the growth is coming from in the industry too, which again leads us back to the operators out of necessity, the customers out of necessity are investing in their own horsepower.
spk03: Got it.
spk00: Thank you very much. Thanks, Ellen. Thank you. And there are no further questions at this time. I'll hand the floor back to management for closing remarks.
spk06: Thank you, Operator, and thanks to everyone today participating in our call. We look forward to speaking with you again after we report our results for the third quarter. Bye.
spk00: This concludes today's conference. All parties will disconnect. Have a good day.
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